Factories busier in June after spring slump

In this May 19, 2011 photo, line worker Dave Zamora works on a pre-production Chevrolet Sonic at the General Motors Orion Assembly plant in Orion Township, Mich. A private trade group says that manufacturing activity in June recovered somewhat from a sharp slowdown in May.(AP Photo/Paul Sancya)

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In this May 19, 2011 photo, line worker Dave Zamora works on a pre-production Chevrolet Sonic at the General Motors Orion Assembly plant in Orion Township, Mich. A private trade group says that manufacturing activity in June recovered somewhat from a sharp slowdown in May.(AP Photo/Paul Sancya)

In this May 19, 2011 photo, line worker Dave Zamora works on a pre-production Chevrolet Sonic at the General Motors Orion Assembly plant in Orion Township, Mich. A private trade group says that manufacturing activity in June recovered somewhat from a sharp slowdown in May.(AP Photo/Paul Sancya) (/ AP)

TALI ARBEL, AP Business Writer

Factory activity picked up in June after a sluggish May, helped by lower gas prices and some easing of supply disruptions.

The Institute for Supply Management, a trade group of purchasing executives, said Friday that its index of manufacturing activity rose to 55.3. The sector has now grown for 23 straight months. Last month's growth was the slowest in 20 months.

The stronger reading was an optimistic sign that the economy could be strengthening after a spring slump.

Stocks jumped after the report was released. The Dow Jones industrial average rose 152 points in midday trading, and broader indexes also rose.

"This is additional evidence that the recent slowdown in economic activity was temporary," said Steven Wood, chief economist for Insight Economists. "However, the strength of the recovery is an open question given other factors."

A reading above 50 indicates that the manufacturing sector is expanding. Still, growth was muted from earlier this year, when the index topped 60 for four straight months. And other areas of the economy remain weak, such as housing and job growth.

Construction spending declined in May to a seasonally adjusted pace of roughly $758 billion, the Commerce Department said Friday. Budget cuts at the state and local level led to a sharp drop in government spending. And home builders cut spending again, chiefly on apartment projects.

Overall, construction spending was barely above an 11-year low hit in February. And it is roughly half the $1.5 trillion pace considered healthy by most economists. Analysts say it could be another four years before construction returns to healthier levels.

The economy grew only 1.9 percent in the January-March period, the government said last week. Most economists predict growth to be similarly weak in the current April-June period.

But gas prices are falling. The average price per gallon was $3.55 on Friday. That's down from nearly $4 per gallon in early May.

Cheaper gas should allow consumers to eat out more often and spend more on discretionary purchases, such as furniture and appliances. Consumer spending makes up 70 percent of economic activity.

And the impact of a parts shortage stemming from the March 11th Japan earthquake appears to be easing. All three U.S. automakers on Friday reported stronger sales in June after a slump in May.

The ISM report gives investors some hope that growth will be stronger in the second half of the year, said IHS Global Insight economist Nigel Gault.

There were slightly more new orders for goods in June, and employment picked up. Manufacturers are adding to their stockpiles again.

Economists are also counting on a recovery in auto production to boost second half growth. Deutsche Bank economists estimate that improved auto manufacturing could add as much as a full percentage point to third and fourth quarter growth.

Some signs from abroad are troubling, too. Chinese manufacturing slipped to its slowest pace in 28 months in June, dragged down by rising interest rates and declining exports, according to surveys released Friday in China.

That suggests problems in the U.S. The factory sector has been the primary driver of the recovery, growing now for 23 straight months. And strong growth overseas has been a key part of that growth for large manufacturers of industrial equipment and machinery, such as Caterpillar Inc.

The ISM, a trade group of purchasing executives based in Tempe, Ariz., compiles its manufacturing index by surveying about 300 purchasing executives across the country.